Preserving client spending in retirement is a critical objective for financial advisors that continues to grow in importance as Americans live longer, stirring fears of longevity risk. Not only are financial advisors asked to preserve their client’s spending capacity in retirement, but they are still expected yield returns to a portfolio. What’s the answer?
Dr. Michael Finke, Ph.D., CFP, believes it could be a Contingent Deferred Annuity (CDA).
This week RetireOne released a whitepaper, drafted in partnership with Dr. Finke, focused on the value of portfolio income insurance in the form of a CDA. Insuring a retiree’s portfolio is a topic that is timely given the recent market volatility, low interest rate environment and America’s aging population living longer, fuller lives.
In the whitepaper, “Portfolio Income Insurance: Understanding the Benefits of a Contingent Deferred Annuity,” Dr. Finke finds that the certainty of lifetime income provided by a CDA may give individual investors the assurance to not only spend confidently, but to continue to invest in equities without the fear that a market downturn will force them to spend much less than planned in retirement.
“It is possible for an institution to guarantee that a retiree will always be able to spend a fixed amount in retirement no matter what happens in financial markets,” writes Dr. Finke, who serves as Professor of Wealth Management at The American College. “Portfolio insurance through a CDA provides the freedom to spend within one’s financial planning boundaries, without the fear of running out of money due to events out of one’s control.”
“Portfolio insurance through a CDA provides the freedom to spend within one’s financial planning boundaries, without the fear of running out of money due to events out of one’s control.”
Dr. Michael Finke
A CDA unbundles insurance protections from underlying investments enabling Registered Investment Advisors (RIAs) to wrap client brokerage accounts, IRAs, or Roth IRAs with portfolio income insurance. CDAs allow retirees to stay invested via ETFs and mutual funds, draw a steady stream during retirement, but also protect themselves against most volatility risks via the approach of longevity risk pooling—where portions of the CDA premiums will be used to provide payments to long-lived retirees. CDA premiums are levied on a retiree’s investments each year.
“Dr. Finke’s studies demonstrate that a CDA can help consumers establish a reliable stream of income that can potentially rise in positive market conditions or protect against diminished spending in the event of market downturns.” said David Stone, Co-Founder and CEO at RetireOne.
“If stocks outperform bonds, the retiree will accumulate a larger nest egg over time,” writes Dr. Finke. “Greater retirement wealth can result in higher spending or a more substantial legacy as a reward for accepting investment risk. However, if investments underperform early in retirement, a retiree can continue to spend the same guaranteed amount despite a much higher risk of outliving savings.”
The new whitepaper is available as a free download on RetireOne’s website.
In related news, RetireOne recently launched a zero commission CDA called Constance in partnership with Midland National Life Insurance Company. It acts as portfolio income insurance and is a first-of-its-kind solution that enables financial advisors to integrate income insurance seamlessly into their client’s financial plans. Constance offers a flat certificate fee and the flexibility to begin taking income at any time, allocate to 75% equities, and sever at any time.
SEE ALSO:
• Inflation, Interest Rates Fuel Retirement Income Stream Worries
• Study by Finke, Pfau Shows Annuities Improve Retirement Outcomes
• Annuities Best for Middle- and Mass-Affluent Clients, Advisors Say